Team: Share cess hike with related sectors

Source: The Star Publication, Malaysia (10/04/00), By Mokhtar Hanafiah

THE government recently imposed a hike in cess on timber products. Timber players are voicing their dissatisfaction, seeking what they feel as a fairer distribution of the burden in funding the Malaysian Timber Industry Board.

They contend that the board's activities also benefited the furniture and medium density fibreboard industries, and thus these beneficiaries should also contribute. MOKHTAR HANAFIAH of Star Business gets the views of two timber associations.

THE Government's move to increase export cess on timber products is not expected to substantially affect the profitability of local timber companies.

However, the industry players feel that the cess should also be shared with other related sectors, such as the furniture and medium density fibreboard (MDF) industries.

They claim that the cess paid by them all these years, which is meant to finance Malaysian Timber Industry Board's (MTIB) ever-increasing promotional activities, have also benefited these two industries.

Timber Exporters' Association of Malaysia (Team) president, Lee Leh Yew, who described the increase in cess as "minimal and bearable", said that TEAM members would have to pass the additional cost to their buyers.

The new rates have raised the export cess for products such as sawn timber, plywood, veneer and moulding from RM1.36 previously to RM5 per cubic metre.

Meanwhile, products such as particleboard/chipboard and blockboard, which were cess-free before, have now been imposed with a RM2 cess for every cubic metre that were exported.

Lee said Team members had already included the increase in cess, which came into effect on March 1, to their costings.

However, for undelivered contracts which were concluded before the implementation of the new rate, members would have to bear the RM3.64 difference in cess themselves.

"As for the new orders that we are about to be concluded, we will have to include the additional RM3.64 into our price. It is then up to the buyers to accept it or not," he said.

Lee said, generally, any increase in cess would have an adverse impact on the industry as it would increase its costs.

"For example, if a company exports 10,000 cubic metres of sawn timber per month, then its monthly costs will be RM10,000 extra, of which it can actually use for other business purposes."

Lee stressed that while Team did not oppose the new RM5 cess, it hoped it could be shared with the other timber-related sectors such as the furniture and MDF makers.

"We are not opposing the new rate. What we are saying is what about the other sectors? Why are they not sharing? If everyone shares, the cess may even come down to RM1 instead of RM1.36," he said.

"We also do not want a sudden increase in cess. We prefer a flat rate that we can work on, which will not affect the market price when we go to our buyers. If we continue adding on to our costs, we may be phased out in terms of competition," he said.

Nevertheless, Lee believes that the increase in price as a result of the cess hike will not affect Malaysia's timber products' competitiveness in the international market.

"I do not think the buyers will look at other alternative markets to replace Malaysia. They will just voice their disappointment (over the price increase)," he said.

"But once the increase is there, in time to come, it will stabilise. The buyers and sellers will get used to it as they put it into their costing," he said.

Mulpha International Bhd senior manager for international operations division George Tan said the cess hike was not expected to affect the company's bottom line. (Mulpha is a Team member.)

Tan said Mulpha would pass the additional costs to its suppliers and buyers. "It will not really affect Mulpha's profit, it will only take a small percentage of our margin."

Tan, who is also Team vice-president, believes that the impact on the industry's performance in general would be very minimal.

He said although the quantum of the increase was a lot (over 300%), in terms of actual sum, it was not very significant to really affect the profit margin of the timber companies.

"It will result in a very minimal effect or no effect at all to the profitability of the timber companies involved, including those listed on the KLSE," said Tan.

He believes that the timber companies will pass the extra cost to their buyers and suppliers.

"If the companies do not pass the additional cost to the buyers and suppliers, they will have to absorb it. Even if they absorb it, it will only result in a minimal reduction in their profits," he said.

However, Tan said, his main concern now was that if the Government was to increase further the timber cess in the future, it would tap from the timber industry again.

He also felt that the cess hike did not come at the right time. "Since the market is not that rosy for the past few years, why not maintain it. Even if there is a need for an increase, the Government must tax on other sectors in the industry."

He, however, did not think that the furniture sector would be affected by the cess. "The furniture makers should be able to absorb it without any problem. The values of their finished products are high," he said.

Tan believes that the forces of supply and demand will become one of the factors to determine who would have to pay for the additional cost.

"For example, if today, it is a suppliers' market whereby the demand is more than supply, then the buyer will absorb the additional cost without saying anything," he said.

"But if it is the buyers' market, then we, the exporters or the suppliers, will have to absorb it," he said.

Tan said the impact of the cess hike would also depend on the timber value exported and the market they were shipped to.

"For example, if you are shipping something to Europe which is (priced at) more than RM3,000 per tonne, so at a cess of RM5.00 a tonne, it is nothing to you," he said.

"But if you are exporting, say, to Middle East markets where your profit margin is sometimes only about RM40 to RM50, with the RM5 cess, it is about 10% of what you normally earn," he said.

The Malaysian Wood Industries Association (MWIA) (formerly The Timber Trade Federation of Malaysia) president Tunku Osman Ahmad said while the timber industry had been paying the cess, the benefit had been reaped by other sectors such as furniture manufacturers.

"What we are worried over is that, if later the government wants to increase the cess further, it would do it on us and let the other sectors free again," he said.

"Why can't they take a little bit from the furniture sector? We have appealed to the government, saying that we do not mind doing our duty (in paying the cess) but it must be fairly distributed to the other sectors as well," he said.

Tunku Osman since the formation of MTIB in 1973, timber export cess was imposed mainly on the exports of traditional timber products such as sawntimber, plywood, veneer and mouldings.

However, with the Government's policy of encouraging downstream processing, new players of the industry--MDF, carpentry and joinery, builders, particleboard/chipboard and furniture--had contributed significantly to the timber sector's export volume and foreign exchange earnings.

Tunku Osman said of the RM5.7bil worth of timber and timber products exported from the peninsular Malaysia in 1998, RM1.8bil was earned from the exports of traditional products (where timber export cess was applicable) while the other timber sector contributed about RM3.9bil.

He said by paying the cess, the timber industry was, in some way, subsidising the furniture and MDF industries.

"The furniture industry, in particular, is getting bigger.

They do a lot of export. If the Government can tap the money a little bit from them, the benefit will go back to them."

Tunku Osman said MWIA members might have to review their prices as a result of the cess hike. "Now that we have to pay so much and everything will be at our cost, we have to think of some way to get back the RM5. Definitely, the price will have to go up a bit."

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